What mortgage points are
Discount points (also called mortgage points) are fees you pay at closing to lower your interest rate. One point equals one percent of the loan. The CFPB notes that the rate reduction is not fixed: it depends on the lender, the loan type and market conditions, so one point might lower the rate a lot or only a little. That is why you should ask each lender to quote the same number of points when you compare. The same CFPB guidance covers the opposite trade, lender credits, where you take a higher rate to cut your upfront costs.
Do not confuse discount points with an origination charge, which some lenders also express as a percent of the loan. An origination fee pays the lender for making the loan and does not lower your rate.
The break-even math, with an example
Assume a $400,000, 30-year fixed loan at 7.00%. Your lender will lower the rate to 6.75% for one point. (That 0.25-point reduction is an assumption for the example; use your actual quote.)
| No points | 1 point | |
|---|---|---|
| Upfront cost of points | $0 | $4,000 |
| Interest rate | 7.00% | 6.75% |
| Monthly principal & interest | $2,661.21 | $2,594.39 |
| Monthly savings | $66.82 |
Divide the cost by the savings and you get the simple break-even: $4,000 ÷ $66.82 = about 60 months, or five years. A slightly more precise answer counts that the lower rate also pays down principal a little faster, so you would owe less if you sold. On that basis the points break even around month 48.
| If you keep the loan | Result of buying the point |
|---|---|
| 3 years | $987 behind |
| 5 years | $1,033 ahead |
| 7 years | $3,052 ahead |
| 10 years | $6,064 ahead |
| 15 years | $10,921 ahead |
Mortgage points break-even
The month discount points pay for themselves, for your loan and your lender's pricing.
The calculator loads as you scroll. Open the full points calculator if you prefer.
Assumptions
- The rate reduction per point is your input; lenders price points differently each day.
- Break-even counts the lower balance you would owe if you sold; tax effects are not included.
When points tend to pay off
- You expect to keep the home and the loan for well beyond the break-even month.
- You have the cash and it will not leave you short of an emergency fund or reserves.
- The rate you are locking is one you are comfortable with for years, rather than one you plan to refinance when rates fall.
- The seller or builder is paying the points as an incentive. Compare that with a straight price reduction using the seller credit calculator.
When to skip points or take a credit
- You may sell, relocate or refinance within a few years. Buying a lower rate you will not hold long is the most common mistake.
- You need the cash for a bigger down payment, repairs or reserves. A larger down payment can also remove or reduce mortgage insurance, which may save more than a point does.
- You expect rates to fall and plan to refinance. Points paid on the first loan are lost when you refinance.
- The quote buys very little rate per point. A point that lowers the rate by 0.125 takes twice as long to pay back as one that lowers it by 0.25.
How points affect APR and cash to close
Points are included in the APR, so the APR rises with each point you pay, even though your monthly payment falls. They also add to your cash to close. Read APR vs interest rate to see how to weigh a lower APR against a larger upfront cost. If a seller or builder offers a temporary rate reduction instead of points, see 2-1 buydown vs permanent buydown.
Questions to ask your lender
- How much does each point lower the rate, and how long is that quote good for?
- Is the rate on my Loan Estimate locked, and what happens if my closing is delayed?
- Can you show me the same loan with zero points, one point and a lender credit?
- Are any of these points paid by the seller, and does my loan allow that?
- What would my APR and cash to close be at each option?
Line up the answers using the Loan Estimate checklist, and see how rate locks work so the quote you compare is the rate you get.
Sources and further reading
Written by the Reaixo editorial team. Last reviewed . Educational information, not financial, legal or tax advice.
Related terms: Discount Points, Mortgage Points, APR in the full glossary.